Chris Lee & Partners Ltd

Market News 25 September

Johnny Lee writes:

The ongoing saga between Synlait and a2 Milk has escalated, with a2 Milk issuing a notice of termination to Synlait, ending the exclusivity supply arrangement between the two companies. The supply agreement itself will still persist, but the exclusivity will end.

Synlait’s share price fell on the back of the news. Its bonds – theoretically repaid in only 15 months’ time – also fell, now trading at around 85 cents in the dollar. A buyer today at this price would earn both the coupon of 3.83%, and receive $1 back for their 85 cents in December next year – assuming the bond repays.

On this front, this morning's result suggested the company fully intends to repay the bond, and utilise bank funding going forward. Time will tell.

Even the manner in which the news of the termination was broken indicated a lack of cohesion. Synlait requested a trading halt, in response to ‘’a material contract with a third-party customer’’. a2 Milk, at almost the exact same time, instead provided significant detail around its decision to terminate the agreement.

The exclusivity agreement in question made Synlait the sole supplier of certain infant milk formula products sold in New Zealand, Australia and China for a2. a2 Milk’s business subsequently made up about a third of Synlait’s gross profit, according to some estimates.

An important piece of context to note is that a2 purchased the majority share of Mataura Valley Milk in 2021, a milk processor based in Gore, for around $270 million. Its partner in this investment – controlling the minority it does not own – is China Animal Husbandry Group, a Chinese state-owned enterprise. a2 notes that ending the exclusivity will give them the option to utilise the facility owned by Mataura Valley Milk, accelerating its growth.

It was therefore not entirely unexpected that a2 would seek to end the agreement with Synlait. a2 would logically seek to bring its manufacturing in-house to internalise these profits and control its supply chain. During analyst briefings earlier in the year, it had indicated that such a shift would be in its long-term plan.

Included in the market announcement from a2 was a note that the company had taken this action due to Synlait’s inability to supply product at the level and timeframe that was contractually required to maintain the exclusive rights. Synlait did not respond to this comment in its subsequent announcement.

Synlait does, however, intend to dispute the cancellation of the agreement. The next step, in this regard, is a 20-day period of negotiation between the two groups, followed by an arbitration process if necessary. Such a process may take months. Synlait shareholders are well versed in the art of lengthy legal disputes.

a2 Milk remains a large shareholder of Synlait. Synlait’s share price decline this year – down 65% - values Synlait at around $250 million, or $200 million for the approximately 80% not owned by a2 Milk. By comparison, a2 Milk has more than this sum on term deposit alone. The other major shareholder – Bright Dairy Holdings – owns about 40% of the company.

Whether there is movement on this shareholder register will be interesting to observe. a2 is obviously cash rich, while Synlait is reporting losses and has many retail shareholders that may be reluctant to inject further capital into the business at this point. On the other side of the coin, a2 owns 20% of a company that this action would negatively impact.

Synlait’s announcement included its new refinancing agreements, extending its debt maturities, but imposing significant prepayments to be made throughout the year. Synlait bondholders have a nervous wait ahead.

Synlait remains in the process of selling some of its retail brands, in an attempt to reduce its debt. Its full year results, published today, suggested this process was ongoing. Presumably, the market for these businesses is very different from 2019, when they were first purchased.

The announcement last week, while not completely unexpected, is another headache for Synlait shareholders. a2 Milk has evolved as a company since the exclusivity agreement was first formulated, and clearly has ambitions to evolve further.

_ _ _ _ _ _ _ _ _ _ 

Both New Zealand King Salmon and Kathmandu have issued updates to market.

New Zealand King Salmon shareholders witnessed an almost total collapse in value in April 2022, following a significant loss of salmon, blamed on warmer weather in the farming area.

The loss of the salmon led to the company completely recapitalising, repaying all debt and effectively reconstructing its entire balance sheet, while also making some key changes to its approach to salmon farming.

Now, this reset is beginning to see results.

Its half year results last week saw a net profit of $10 million, up from last year’s loss of $25 million. Fish mortality rates have fallen, a key growth channel has progressed and next year’s forecasts have been lifted.

The fall in fish mortality rates – its best ever result on this front – was put down to a new technique of keeping fish in lower temperature areas. At the same time, the company is hoping to continue work on breeding more ‘’thermo-tolerant’’ salmon, giving them more flexibility as the globe’s weather patterns evolve.

Blue Endeavour, the planned open ocean salmon farm, has concluded mediation and the company now awaits review from the Ministry of Primary Industry, expected to conclude in November. From there, the next step is a lengthy process of monitoring, which may begin as soon as next year. A pilot programme will be conducted, and if successful, the company intends to ramp up its open ocean aquaculture projects.

The company is continuing to enjoy a position of strength with regards to pricing, with strong demand giving it the ability to increase its pricing as costs increase. 

This demand profile is changing, with Australia, North America and Asia (excluding Japan) performing strongly. Europe, Japan and New Zealand all saw declines.

The catastrophic events of last year saw many shareholders re-evaluate the risk profile of New Zealand King Salmon, and the share price declined as these shareholders quickly exited. Last week’s result should restore some of this lost confidence, but the journey to growth – and dividends – will be long and is not without risk.

Kathmandu, the outdoor goods retailer, saw its price fall after its full year results, which came in at the bottom end of its stated guidance.

Like most operating in the retail sector, costs have soared, as the company looks to pass on this pressure to consumers. While sales reached a new record, growth in underlying profit was modest.

One cost that is easing is freight, which saw a significant spike during the COVID shutdowns. Freight costs became absurd during the height of these shutdowns, but have moderated since the globe re-opened for business.

Kathmandu has stated it intends to move to a net cash position by July 2024, reassuring news to shareholders observing a sector struggling with debt management.

Each division saw growth, although OBOZ and Kathmandu both outperformed Rip Curl. All three intend to seek international expansion as a key driver going forward, with North America and Europe being markets for growth. A return of international tourism will play well across the product range.

Perhaps the aspect of most concern was the trading update provided in the forward outlook. The first six weeks since reporting date has seen sales decline, as the rising cost of living continues to weigh on discretionary spending.

A dividend of 3 cents was declared, payable on the 20th of October. It will not be imputed. The company also notes that future dividends will likely reflect the relative performance of the half year period – meaning that the company may split its 6 cent annual dividend unevenly moving forward. Prior to COVID, its October dividend was substantially larger than its April payment.

While the result saw a negative reaction, the headwinds facing the retail sector should be of no surprise to investors. The company believes tourism demand may help counter this headwind, and the decision to move to a net cash position over the next twelve months should provide comfort to its shareholders.

Travel Dates – September & October

Our advisors will be in the following locations, on the following dates:

28 September – Tauranga – Johnny

29 September – Hamilton – Johnny

11 October – Christchurch – Johnny

17 October – Wairarapa - Fraser

24 October – Takapuna, Auckland – Chris

25 October – Ellerslie, Auckland – Chris

27 October – Christchurch - Fraser

Clients and non-clients are welcome to contact us to arrange an appointment.

Chris Lee and Partners Ltd

Market News 18 September 2023

Johnny Lee writes:

Briscoe Group’s half year result painted a picture of a company producing profits despite difficult conditions, as screws continue to tighten on the retail sector. The share price climbed modestly after the result announcement.

The retail sector typically reports its results in September and October. The likes of The Warehouse and Hallenstein Glasson also due to report this month, with results expected over the next fortnight.

Briscoe’s result saw a -6.7% fall in net profit, despite a very modest increase in revenue. 

This decline continues the trend since 2021’s stellar jump in profit, which rose 70% and represented something of a step-change for the company. Since then, profit has eased from $47 million to $46 million last year, and $43 million this year.

The increase in revenue and sales came from both homeware and sporting goods, as a number of popular sporting events prompted sales in this particular division. Events including the women’s Football World Cup, the success of the Warriors rugby league team, and the Rugby World Cup, have all contributed to renewed interest in sporting attire.

Staff costs continue to climb, with the company electing to repeat last year’s wage increase by lifting in-store hourly wages by a further 7%. Beyond this, it is clear from the investments being made in leadership programmes, engagement surveys and ‘’mental health focus groups’’ that Briscoes is wanting to lead the sector in terms of staff development. 

Sales margins continue to weaken, as retail continues to experience headwinds. The company has a stated goal of protecting half the margin increases it achieved during COVID – it has lost some of these gains already, but the rate of decline seems to be slowing. Easing freight and transport costs will help in this respect.

Interest costs were also higher – a reality for virtually every indebted company now, after years of rising interest rates.

Investment into its online platform remains a priority. Online sales have gradually fallen from 22% of sales during COVID, to 18% this half year. Assuming such lockdowns are unlikely to return, growth in this channel will need to come from improvements to the platform and increasing awareness of its value.

The offline channel has expanded at the same time, with the new Ashburton Rebel Sports store opening during the reporting period. New stores means new customers, even during a period of difficulty in the sector.

Product range is expanding as well, with Dyson, Samsung and Ecoya all listed as joining the shelves. Product range growth is another easy win – tempting both existing and new customers to enter the store, providing an opportunity to showcase its full product range.

Its cash balance remains high, supporting the 12.5 cent per share dividend, up from 12 last September. While many in the sector are struggling to access capital as they enter survival mode, Briscoe will feel stronger tackling the anticipated downturn than most. 

Shareholders should feel pleased with the resilience of the company, after a torrid 2022 which saw its share price fall nearly 30%. Dividend growth has been consistent, moving from 20 cents in 2019 to 28 cents in 2023. 

The latter half of the 2024 result may be more challenging and is unlikely to match last year’s record. Declining margins and slowing sales growth may indicate the tide is turning against the sector, but the company is confident that a strong profit can still be achieved and a return for shareholders will still be made.

 ---

The Fisher Funds have also provided an update to market, giving investors in the Kingfish, Marlin and Barramundi products an insight into portfolio performance.

Kingfish, its New Zealand fund, is struggling the most of the three. Several of its largest positions – Auckland Airport, a2 Milk, Fisher and Paykel Healthcare and Mainfreight – have all struggled over the last month. The company noted that it has elected to reduce its exposure to a2 Milk, fearing ongoing headwinds from persistently low birth rates. Kingfish elected not to participate in the recent Auckland Council sell-down of Auckland Airport, proving a good decision so far as the price heads lower. 

Marlin, the international fund, also reported a fall in its update. The continued decline across both Dollar General and Dollar Tree was joined by a steep decline in the Paypal share price. While there were some gains from the likes of Amazon and Mastercard, the overall trend was negative, particularly in the consumer discretionary space. 

On a more positive note, the Australian-based Barramundi had a major win with its investment in audio technology firm Audinate. Sharp falls from both Wisetech and Resmed – both much larger holdings than Audinate – offset some of these gains. Barramundi also added Johns Lyng Group to its portfolio, a company focused on the building restoration sector - specialising in repairing damage caused by events such as weather or fire.

The Fisher Funds have long seen usage from retail investors across the country, valuing their dividend income and diversification. 2023 has largely been a middling year for these investors, with large declines in dividend income as underlying asset values fall. 

The next dividends across these funds will be paid on the 22nd of this month.

---

Economic data released last week show the unlikelihood of rapidly falling interest rates, as investors, borrowers and central banks try to predict the likely pathway of global interest rates.

Locally, food inflation data continues to provide headaches, with prices continuing to climb on both an annual and month-to-month basis. 

Food prices were up 8.9% since last year, which was itself up 8.3%. 

Price rises were up across the board, with meat, fruit, vegetables and beverages all recording annual increases. Grocery products – eggs, yoghurt – saw the largest increase.

This followed a spike in oil prices earlier in the month, with crude oil now up over 10% over the last two weeks. These increases came on the back of an agreement by Saudi Arabia and Russia to reduce oil output and drive prices higher.

Mortgage costs are also climbing, with bank economists warning that homeowners have not yet fully absorbed the cost of rising rates, as fixed mortgages continue to rollover at today’s newer, higher rates.

Between higher food, petrol and mortgage costs, it is inevitable that businesses – especially those reliant on discretionary spending – will find themselves battling for a shrinking consumer wallet. The question is whether these forces will continue to spiral higher, or instead moderate to levels in line with Central Bank mandates.

Most Central Banks seem to be in a holding pattern, maintaining interest rates at current levels in the hope that these inflationary impacts subside over time. The European Central Bank has made it clear that it believes rates have peaked. It lifted its key interest rate to 4% and stated that interest rates will remain at such levels ‘’for as long as necessary’’.

The exception to this seems to be China, which is lowering interest rates as deflation risks rise and its property market begins to experience difficulties.

With data suggesting inflation is yet to be tamed, investors and borrowers alike will be planning for interest rates to remain at or around these levels for some time yet. Unexpected events – like those seen in the oil market – will introduce new concerns that can and will shift the market. 

Our own Central Bank next convenes on the 4th of October.

---

Auckland Council Senior, Secured Green Bond Offer

Auckland Council (AKC) has announced that it has opened a new 5-year senior secured bond.

The interest rate has not been set but will be in the vicinity of 5.40%.

AKC has a strong credit rating of AA.

AKC will not be paying the transaction costs for this offer. Accordingly, clients will be charged brokerage.

More details regarding the bonds, including a term sheet, have been uploaded to our website below:

https://www.chrislee.co.nz/uploads//currentinvestments/akc150.pdf

If you are interested in a FIRM allocation, please contact us promptly with the desired amount and the CSN you wish to use, and we will add you to our list.

The bonds are open today and close at 9am, Wednesday, 20 September. Payment will be due no later than 25 September.

--

Travel Dates - September

Our advisors will be in the following locations, on the following dates:

19, 20 September – Napier - Edward

21 September – Rotorua – Edward

27, 28 September – Tauranga – Johnny

29 September – Hamilton - Johnny

Clients and non-clients are welcome to contact us to arrange an appointment.

Chris Lee and Partners Ltd

Market News 11 September 2023

Johnny Lee writes:

EROAD’s decision to launch a capital raising - raising money from existing shareholders at 70 cents per share – has led to a number of surprising developments, three months after a takeover offer was made by Canadian Group Volaris through its subsidiary Brillian.

The most intriguing of these developments was the response from this new major shareholder and would-be owner Volaris, which reportedly owned 18.7% of EROAD prior to the announcement. The dilution from this offer could see this percentage decline to nearer 12%. EROAD’s statements in its offer document suggests it had sought (and later achieved) a waiver to NZX rules to accommodate Volaris with regards to the takeovers code.

Instead, Volaris opted to comment on its position via the media, publicly stating its position that it would not support the offer at 70 cents. After offering to pay $1.30 per share in June, including a commitment to grow the company with its ‘’market access, expertise and capital’’, Volaris would not invest $9 million to maintain its proportional holding in September.

As the offer is underwritten, these shares would instead go to either the underwriters, or participants in the bookbuild process. The identity of these bidders may become public, should a Significant Shareholder Notice be triggered.

Volaris complained that EROAD had previously indicated that it did not require additional capital and had sufficient headroom with its credit facilities to fund growth. Such declarations were made as recently as July. 

Volaris also complained that EROAD should have instead reached out to Volaris specifically ‘’to discuss alternative options’’. On this point, Volaris may be overestimating its reach. It does not control EROAD. Seeking private funding lines from major shareholders is something that must be navigated carefully to avoid accusations of uneven shareholder treatment, especially in the context of New Zealand’s history.

EROAD’s response – again, made through media – simply directed Volaris to participate in the process alongside its other shareholders. 

Volaris’ next move will be telling. It seems to have no interest in maintaining its stake at 70 cents per share. This would imply that there is even less interest to acquire more at the aforementioned $1.30 price. Is its strategy simply to hold 12% of a New Zealand small cap company and publicly deride its management in the media? Or will it eventually sell out, accepting its loss and moving on to other investment options?

Perhaps this saga will serve as a reminder as to the importance of securing board support when launching takeovers.

Volaris, publicly listed in Canada via its parent company Constellation, has its own shareholders to consider. While this one investment is a completely insignificant amount relative to its $60 billion market capitalisation, it would still face questions internally and externally if its situation deteriorates.

The impact of these decisions on EROAD’s own share price will be worth observing.

The share price has been largely anchored around this $1.30 takeover price since the announcement of the bid, as some speculated on Volaris making a higher bid. Others speculated that Volaris would simply wait for the price to fall, and pressure to mount on the board to engage with the offer. 

In the absence of this takeover interest, the company may be valued very differently. Adding to this, the overhang from Volaris’ proportional entitlement will fulfil many buyers, adding more short-term pressure to the price.

One group that will be very pleased will be those that accepted Volaris’ initial offer at $1.30. Even if these sellers were regretting their decision, the price to re-enter is now materially lower.

In amongst all the intrigue surrounding Volaris’ intentions, there is also a question to be raised regarding the structure of the rights offer itself.

The offer is separated into two parts – an $11.6 million dollar institutional placement, and a $38.4 million dollar retail offer.

Another option would have been to simply launch a $50 million pro rata offer, allowing all shareholders to bid equally. No rationale was provided for the structure of the offer. The institutional placement was made to selected institutional investors, invited at EROAD’s discretion. 

Perhaps the company feared the $11.6 million could not be achieved by existing shareholders alone, or that there would be some benefit to retail holders to invite new shareholders on board at a steep discount. Time will tell.

The placement completion notice, released to the NZX today (Monday), noted that its two largest shareholders had declined their opportunity to participate. EROAD instead welcomed back ‘’returning’’ shareholders at the price of 70 cents.

EROAD has naturally faced questions regarding whether the capital raise has been deliberately designed to reduce Volaris’ influence. EROAD deny this. Volaris’ decision not to engage also weakens the validity of this criticism. Ultimately, any new or growing shareholdings disclosed over the weeks ahead, including the ‘’returning’’ shareholders, might be telling.

Outside of all the dramatics surrounding the capital raising, there is important information for retail shareholders to consider. The facts, fortunately, are more straightforward.

Eligible shareholders are invited to purchase additional shares at 70 cents. They can purchase these additional shares up to a ratio of 1 new share for every 2.06 shares already held.

By way of example, a shareholder with 5,000 shares today, could buy 2,427 more shares for $1,698.90.

Shareholders will need to apply through a dedicated website: www.shareoffer.co.nz/EROAD

The offer has a very brief turnaround – opens 12 September, closes 21 September – so shareholders should organise their affairs now.

Shareholders who will not or cannot participate in the offer may receive compensation for their dilution. The lead managers intend to organise a bookbuild for any unallotted shares. If this bookbuild clears at a price above 70 cents, some of this excess will be paid to shareholders.

As the record date has already passed, shareholders also have the option to sell shares now, and purchase back at 70 cents through the offer, locking in a gain should they fear a further deterioration of value. 

With the price likely to fluctuate, most shareholders will likely be waiting until close to the closing date of the 21st. If the price maintains a healthy premium above 70 cents, I expect many will accept the opportunity to average down their existing cost price.

The offer does not include a downside protection clause. If the price falls below 70 cents, investors will simply disregard the offer. One does not pay $2 for a $1 coin.

The market opened today at $1.08, but traded lower almost immediately. Shareholders should watch this price carefully before making their investment decision prior to the close on the 21st.

_ _ _ _ _ _ _ _ _ _

During what should have been a positive period, SkyCity Entertainment Group has seen its value decline sharply after receiving notice that the Department of Internal Affairs is looking to temporarily suspend its licence to operate.

Such a suspension will likely be short-term – the announcement suggests an approximation of 10 days – but nevertheless comes with an impact to both revenue and reputation.

The potential suspension comes after a former customer complained to that regulator that the casino failed to meet its obligations to detect the customer’s continuous play. These obligations are, theoretically, designed to determine problem gamblers and ensure that gamblers take breaks during extended stays at the casino.

Regardless of one's stance around the issue of personal responsibility, investors will be frustrated with the outcome. Sky City will need to ensure its practices are ironclad if it does not want to expose itself to these sorts of people.

SkyCity has long been an intriguing option for investors, trading with a gross dividend yield of around 8.5%. 

The company is highly exposed to a number of negative trends – consumer discretionary spending, overseas tourism – and suffered immensely during COVID. Its share price has fallen around 50% over the last five years, while these dividends have been intermittent at best.

The other negative trend has been the gradual adoption of ‘’ethical’’ investment, which leads some investors to exclude gambling from investment considerations. A number of fund managers have been vocal on this issue, repeatedly expressing their unwillingness to invest in Sky City. Stripping away a large cohort of buyers inevitably leads to an re-evaluation of asset values - in this case, a lower price and higher yield.

The emergence, globally, of online gambling will also be an interesting trend to observe. Consumer behaviour is changing, and the sector is changing with it.

After announcing its results last month, including a sharp rebound in revenue and profit, Sky City’s share price should have been seeing momentum. This latest issue will be a setback - hopefully a short term one - and should instigate some change internally.

New Issues

The Precinct Properties convertible note issue set its interest rate to a smidge over 7.50% for both the 3-year & 4-year term. Convertible notes differ from vanilla bonds in that the notes are repaid in Precinct shares rather than cash.

Precinct offered two tranches: one matures in 2026 with a price cap of $1.36, and the other in 2027 with a price cap of $1.40. 

These caps determine the share conversion ratio. For instance, a $10,000 investment in the 2026 series with a cap of $1.36 would yield at least 7,352 shares on maturity. If the share price climbs to $1.60 by maturity, these shares would be worth $11,763, presenting investors with a capital gain.

If the share price is below the cap at maturity, then additional shares will be issued to reach the initial investment value of $10,000. Precinct has the option for cash repayment, but this is unlikely.

Investors stand to gain from a high fixed rate of return for 3-4 years, and the potential for a capital gain.

Please note that Precinct will be paying the transaction costs for this issue. Accordingly, clients will not be charged brokerage.

Further information, including a presentation and investment statement can be found here:https://www.chrislee.co.nz/uploads//currentinvestments/PCTHC.pdf

Auckland Council

Auckland Council have announced it plans to offer a 5-year senior bond, with a likely interest rate of above 5.25%. This investment will open next week.

Auckland Council will not be paying the transaction costs for this issue. Accordingly, clients will be charged brokerage.

If you would like to go on the list for this bond, please contact our office and we will pencil you on our list, pending further information.

Travel Dates - September

Our advisors will be in the following locations, on the following dates:

13 September - New Plymouth - David

19, 20 September – Napier - Edward

18, 19, 20 September – Christchurch (FULL), Ashburton, Timaru – Chris

27, 28 September – Tauranga – Johnny

29 September – Hamilton - Johnny

Clients and non-clients are welcome to contact us to arrange an appointment.

Chris Lee and Partners Ltd

Market News 4 September 2023

Johnny Lee writes:

Dividends are returning to shareholders of the tourism sector, as a number of companies began lifting the suspension on shareholder distributions.

Auckland Airport, Air New Zealand and Tourism Holdings have all announced dividends for their respective shareholders, after years in the doldrums as the industry contracted following the tourism shutdown during COVID.

Air New Zealand’s dividend of 6 cents has been labelled as a ‘’one-off special dividend’’, with a new dividend policy announced to return 40-70% of net profit to shareholders going forward. 

Shareholders should make note of Air New Zealand’s comment that imputation credits are unlikely for some time, as the company makes its way through the considerable tax losses that it accumulated during COVID. This may take years.

Air New Zealand also intends to adopt a more conservative approach to its liquidity, ensuring it maintains liquidity of around $1.5 billion going forward. While this may impact shareholder returns, it is clear that the ‘’rainy day fund’’ for airlines will need to be significantly bolstered to deal with the risks facing the airline industry.

Inflation – particularly around fuel and staffing costs – continues to weigh on expectations surrounding future earnings. As Air New Zealand has said publicly, it does not foresee a return of 2019 airfare pricing.

The next few years will involve re-establishing its fleet, as it looks to ‘’add more seats to the sky’’. These increases in capacity are a response to growing demand, as the company looks to reform itself with a more conservative approach than years gone by.

Auckland Airport’s result saw a similar recovery, as underlying profit after tax was recorded at $148 million, up from last year’s loss of $12 million. As one would expect, revenue rose significantly after a challenging 2022, while costs saw a much more modest increase. Passenger numbers, particularly international passengers, saw a significant rebound from 2022.

The biggest contributors to this rebound in revenue were passenger services charges and income from retail stores. Car parking income was also stronger.

The company provided guidance that next year’s result is expected to be nearer $270 million, a figure close to historical levels.

Ultimately, the biggest question marks were reserved for its capital expenditure programme, which saw a total expenditure of $650 million for the 2023 year. This is expected to almost double next year, to nearer $1.2 billion dollars.

Auckland Airport acknowledged the criticism of its expenditure programme, which has largely centred around the timing and cost of the programme. Auckland Airport has invited the airlines to provide feedback on the plans, which will no doubt see a greater cost passed on to flyers in and out of Auckland.

A dividend of 4 cents per share was declared, forecasted to double next year. Its most recent annual dividend, from 2019, was 22.25 cents. While 4 cents per share may seem lacklustre to long-term shareholders, Auckland Airport will be hoping the capital expenditure programme will generate stronger profits – and therefore dividend growth.

More news for Auckland Airport shareholders followed the annual result announcement, as the Auckland Council finally executed the sale of its shares.

The council confirmed that it had sold down its stake from 18.08% to 11.08%. The share price responded positively to this, as the ‘’overhang’’ of this large, motivated seller was lifted.

Auckland Airport is profitable, has produced a small dividend and plans to continue its capital expenditure programme to modernise its assets. This has been met with some criticism, but the company seems convinced this is the best long-term approach, as domestic and international tourism returns to our shores.

_ _ _ _ _ _ _ _ _ _

Tourism Holdings shareholders also saw some good news, as the company announced its first dividend in years, alongside its $50 million profit. 

A 15 cent distribution to shareholders will be paid to shareholders on the 29th of September.

Like Air New Zealand, Tourism Holdings has a capital expenditure programme in place as it rebuilds its fleet of vehicles, forecasted to increase by about a third over the medium term. 

Few listed companies saw as great an impact from COVID as Tourism Holdings. Its shares plummeted from $6 to nearly $1, before recovering to its current levels around $3.50. It joins Air New Zealand in the task of rebuilding itself and its capacity, as the sector hopes that the worst is behind it.

_ _ _ _ _ _ _ _ _ _ 

 Another company that continues to enjoy a rebound is Sky Network Television.

Its result saw revenue, profit and dividends all increase year on year, with its stated outlook for all three metrics to improve even further. The company intends to double its dividend – which represents a gross yield of about 7.30% on current pricing – over the next three years. This target is aspirational, rather than a formal forecast.

Sky Box numbers continued their decline, as more customers engaged with the Sky streaming service. By next year, streaming may surpass Sky Box numbers for the first time.

Sky’s broadband internet service is now contributing positively to the company’s bottom line. With this market beginning to saturate, it will be a challenge to maintain its initial momentum.

The ever-fickle advertising revenue was slightly stronger for the second consecutive year. Sky TV warns that the battle for market share is intensifying as the advertising market itself struggles to grow. 

Its long-running share buyback programme remains in place, with approximately four million shares remaining to buy before the March 31 end date.

After nearing collapse in 2020, Sky Television is now paying dividends and has plans to reward those shareholders who rescued it from disaster. 

The 9 cent dividend will be paid on the 22nd of September.

_ _ _ _ _ _ _ _ _ _ 

The Precinct Properties convertible note issue is now underway, as a smorgasbord of new bond offerings hit the market. 

Bond offers from BNZ Bank, SBS Bank, and Infratil have all been announced or completed recently. Contact Energy has also hinted that it may pursue another long dated subordinated bond, as it continues its build programme.

Listed convertible note issues are rare, although this marks the second iteration from Precinct. It is clearly a structure the company favours, as it looks to manage its debt levels, while raising capital from a group of investors who may not partake in a simple issue of new shares.

Convertible notes differ from vanilla bonds in that the notes are repaid in Precinct shares rather than cash.

Precinct Properties is issuing two convertible notes, both with a minimum interest rate of 7.00%.

There are two tranches: one matures in 2026 with a price cap of $1.36, and the other in 2027 with a price cap of $1.40.

These caps determine the share conversion ratio. For instance, a $10,000 investment in the 2026 series with a cap of $1.36 would yield at least 7,352 shares on maturity. If the share price climbs to $1.60 by maturity, these shares would be worth $11,763, presenting investors with a capital gain.

If the share price is below the cap at maturity, then additional shares will be issued to reach the initial investment value of $10,000. Precinct has the option for cash repayment, but this is unlikely.

Investors stand to gain from a high fixed rate of return for 3-4 years, and the potential for a capital gain.

This offer structure exists as it allows Precinct to borrow $200 million dollars from bond investors without having to repay in the form of cash – effectively a share issuance to noteholders. This reduces gearing, assuming the company elects to repay with shares.

The advantage to these noteholders is that they receive a relatively a higher rate of return, and have an opportunity for capital gain, while being somewhat protected from a falling share price. Ultimately, issuing new shares is dilutionary, and can lead to short-term selling if noteholders convert shares back to cash. 

The offer may also be compelling to one who was considering becoming a long-term shareholder of Precinct. The interest rate on the notes exceeds the distribution yield on the ordinary shares and is fixed for the term. Shareholders in Precinct, by contrast, will earn dividends based on the underlying performance of the company, and its discretion to pay such distributions. 

Precinct’s trading update, issued with the note offer, paints a picture of a company experiencing high occupancy rates, with a significant pipeline of development projects, and one that is diversifying its risks by finding partners for these upcoming projects.

While the property sector is hardly flavour of the month, Precinct is experiencing revenue and net income growth. The share price has struggled ever since the COVID downturn, as negative revaluations continue across the sector. Recent updates from its peers suggests these negative revaluations remain an issue, as higher interest rates impact these valuations.

However, these convertible notes promise a fixed rate of return for 3 or 4 years, maturing at that time in the form of new shares, with a conversion mechanism that offers downside protection for noteholders, and a potential for a capital gain on maturity.

The offer is open now and closes at 10am on 8 September. Payment would be due no later than 19 September.

Please note that Precinct will be paying the transaction costs for this issue. Accordingly, clients will not be charged brokerage.

Further information, including a presentation and investment statement can be found here:https://www.chrislee.co.nz/uploads//currentinvestments/PCTHC.pdf

If you would like a firm allocation of these notes, please contact us urgently.

_ _ _ _ _ _ _ _ _ _

Travel Dates - September

Our advisors will be in the following locations, on the following dates:

6 September - Auckland (Ellerslie) - Edward

7 September - Auckland (North Shore) - Edward

8 September - Auckland (CBD) - Edward

13 September - New Plymouth - David

14 September - Wellington – Edward

19, 20 September – Napier - Edward

18, 19, 20 September - Christchurch, Ashburton, Timaru – Chris

27, 28 September – Tauranga – Johnny

29 September – Hamilton - Johnny

Clients and non-clients are welcome to contact us to arrange an appointment.

Chris Lee and Partners Ltd